LECTURE 9-10: CONSEQUENCES OF LIMITED FISCAL CAPACITY

Question 1

problem of

Answer 1

organising military service, credible commitment to collect public resources

Question 2

commitment problem N and W

Answer 2

because the actors that will play a significant economic role in 18th did not have incentives to stimulate economic growth due to uncredible commitment by crown, they select the best institutions for them (constitution that protects property rights). societies fail because they select weak institutions

Question 3

solution

Answer 3

good rules and credible commitment: guarantee secure property rights (behave ex-post the same way he promised ex-ante)

Question 4

mechanisms that guarantee ruler repayment

Answer 4

• reputation: short-run perspective, informal way, didi to work
• political institutions (constitutions): formalised, select rules that regulate relationships => self-enforcing (imply means to restrict rulers abilities to deviate from agreement

Question 5

fiscal situation of stuarts

Answer 5

1603, fiscal capacity problems due to:
- increasing military expenditures
- institutional and fiscal setting based on the expectation that king had to live on his own
- parliament’s approval was not necessary to impose a new taxation

Question 6

system of revenues stuarts

Answer 6

mixed, because expenses were higher than revenues:
- forced loans, sales of monopoly, sale of crown lands, sale of aristocratic titles, new customary taxes, expropriation of citizens properties

Question 7

how did crown exercise discretionary power

Answer 7

• royal prerogatives: quasi-legislative power of the crown. exploit to issue bills without parliamentary consent
• star chamber: took decisions supplementary or going above the ones taken by common courts
• direct selection and remuneration of judges by crown

Question 8

consequences of institutional setting beofre

Answer 8

• limited possibility of checking on rulers power
• high concentration of power
• bad economic outcomes

Question 9

civil war changes institutional and fiscal

Answer 9

• abolition of star chamber
• restriction to sale of monopolies
• stable role of parliament
  ineffective because the removal of the crown was an insufficient measure to prevent arbitrary use of power + no constraints on crown in case it would come back + no stable solution to fiscal prob

Question 10

glorious revolution

Answer 10

• parliament had power to check on crown’s decisions and exclusive authority in raising new taxes
• royal prerogatives subjected to common law
• judges independent power

Question 11

effectiveness of revolution

Answer 11

those who held wealth had not control over crown activity

Question 12

self-enforcing framework

Answer 12

• credible threat of removal
• exchange of power for commitment: wealth holders had incentives to lend resources

Question 13

why parliament not acting as king

Answer 13

• several actors with veto power: separation of power
• trade interests: preference for limited government intervention (parliament represents economic powers)
• independent judiciary system

Question 14

consequences of new institutional set

Answer 14

• increased control by wealth holders
• elimination of arbitrary power
• enhanced credibility of government commitment
• improved capital market performance
• long term economic impact

Question 15

PA problem under Qing china

Answer 15

ruler needed to raise resources but prob of credible commitment 19h: social unrest and external threats.

Question 16

model

Answer 16

in administration of tax collection, PA problem due to physical distance between decision maker and admin collecting taxes.

Question 17

agent

Answer 17

incentive to extract more resources

Question 18

ruler

Answer 18

monitoring costly and complicated, ruler can’t observe if deviation is happening. he wants to avoid revolt: monitor agent and impose fine. monitoring depends on distance, technology and ruler time constraint

Question 19

1st equilibrium. fiscal capacity

Answer 19

PA leads to decrease in fiscal capacity: monitoring capacity is low, high change that agent deviates and that pop revolts => ruler has to keep tax low

Question 20

2nd: size of bureaucracy

Answer 20

PA => weak fiscal capacity => small bureaucracy. ruler sets number of counties with cost. when monitoring capacity low, since tax rate small, B will be small also

Question 21

3rd equilibrium: impact of economy

Answer 21

economic expansion (increase in income) will initially increase the tax revenue (higher tax base) but eventually depress it (more extortion).

Question 22

evdence

Answer 22

moving away from capital: lower tax base and same for number of counties